No Stock Recommendations here; move along

Baruch recently found himself commenting on Wall Street Cheat Sheet, on a post by Damien Hoffman, who seems to really dislike Jim Cramer. The post was about some investigation of TheStreet.com by the SEC, which Damien thought highly amusing, perhaps because he also runs a competing subscription-based financial edutainment site. Now, Baruch doesn’t pay attention to Jim Cramer on TV, but in fact quite likes him in print. He reads his posts on theStreet.com, and respects his track record as a hedge fund manager and pioneer econo-blogger. So Baruch felt a brief moment of annoyance about seeing someone he liked being unecessarily trashed, but soon his heart was filled with forgiveness and understanding again. We must not be too harsh; snark is Damien’s job, what he gets paid for. He is a financial blogger-journalist, and being cheeky about mainstream media figures is part of that David and Goliath thing blogging used to be all about.

Anyway, this post is only a bit about Jim Cramer and Damien Hoffman. The exchange got Baruch thinking about the differences between journalists/bloggers (or whatever you want to call them) and investors, and what it means to communicate about investments with the public. Baruch finds this terribly interesting, because of course as an amateur econo-blogger and a professional investor, he has a foot in both camps.

Some of Baruch’s best friends are, or have been, financial journalists and commentators, on blogs and print. Being a financial journalist is a good, interesting job, and very important to the proper functioning of a marketplace. Journalists can do things, find things out, and explain things the public and investors need to know in ways investment professionals can’t, at least without risking jail.

But in the end journalists are explainers, commentators. They are dependent on market participants to provide them with things to write about. They review what others do. They work with the huge advantage of hindsight. And when it comes to giving advice about what what should be done, most media commentators are no better than the rest of us. Probably worse; they don’t get as much practice at it.

The major problem that commentators have is that rewards are based on reputation. Praise from peers and increased readership is the only way they have of knowing how good at their jobs they are. This is dependent on how smart the writer sounds, rather than how good he or she is at giving actual foresight. It’s a difficult thing, having to appear smart all the time. A well publicised prediction gone wrong can be pretty devastating to a reputation and undo lots of less well-publicised predictions which went right. Many writers solve this problem by not making many predictions at all. This is why most analysis pieces in newspapers and mainstream blogs end up in prevarication and fence sitting. Most journalists these days are smart enough not to end their articles with the words “only time will tell” — but they may as well.

The need to constantly appear smart also incentivises some to find a shortcut. A good and quick way of appearing relatively smarter is to find some fellow commentator who has broken the cardinal rule of journalistic punditry and actually had a stab at predicting something in a clear, falsifiable way — and got it wrong. Pointing out someone’s errors is a good way to come up with copy when you can’t think of anything constructive to say.

Ironically, consumers of financial media are actually crying out for someone to tell them what to do, rather than the prevarication they are confronted with everywhere. So pundits who do state clear positions tend to get eyeballs pretty quick. This unsettles their peers, who are universally relieved when these outliers inevitably cock it up, and they can now write gleeful articles about how it was obvious their colleague didn’t really know what he was talking about in the first place. Realising this, even sites which purport to give readers actionable intelligence, such as Lex, don’t actually tell them what to do, which would be too risky. A conclusion is always hinted at, but never made as plain as ” we think you should sell”. Instead you get some coded priggishness, like the chairman of company X “should enjoy the view from the top while he can”. Which gives the Lex writer enough wiggle-room to appear clever whatever the outcome for shareholders. This is, after all, the point of his writing, which he would freely admit to you as well if you bought him a pint.

Compare financial journalists now to actual market participants. While every now and then hedge funds get in a feeding frenzy and will short your longs and go long your shorts if they think you are in distress, the rest of the time professional managers are remarkably civil about each other in print, in person, and in front of clients. They don’t have cat fights very often.

I think this is because they have their annual Number to point to. You can have an embarrassing reputation for sartorial style or personal hygiene, but if you make me money, I simply won’t care. The only way to trash talk a competitor so as to negate his track record is to insinuate dishonesty or fraud, and that’s the nuclear option. Professional investors are all facing a common enemy, the market, very much as sailors do the sea. Unlike the pundits, professionals don’t have the luxury of wiggle-room. If your PALM blows you up you can’t go off to the exchange and explain that you didn’t mean to buy the stock, someone merely misunderstood your order and took it out of context. They also know it’s impossible to make money without taking risks, some of which will crystallise. Many times you will end up looking like a total spazzer. For a financial commentator that would be a disaster. But for us that’s OK. We don’t have to show our work. In the end we have our track records, the returns we create over time net of all the dumbass boneheaded calls we made. If we have succeeded and produced a positive, audited, return, no-one can take that away (unless of course you were running a massive Ponzi scheme with auditors were working out of a shack on Miami Beach, and you were just making it up).

When one of us blows up, our initial emotional response tends to sympathy, with only a bit of schadenfreude. There but for the grace of god, we think, before wondering how we can get our hands of what’s left of his clients’ money. We admire our peers who make consistent positive returns, but also those that came back from misfortune and prospered. To say “He knows how to take a loss,” is an enormous compliment, and the best of us understand that when someone finally capitulates , after months of pain, on a prominent call they have made, that is often the point the nasty market decides the bet was right all along and finally goes their way. Without them. Anyhow, it’s very different from being a pundit.

But don’t conclude from this that Baruch feels superior to paid commentators. Oh god, no. Baruch loves blogging, and it enriches his life. It would be nice to have a job which didn’t depend to such a large extent on luck, on factors totally outside your control. I know at any point a massive accounting scandal in a cherished long, or the misplaced takeover of a short could totally blow me up. I will have no idea what is going to happen to when I walk into the office monday morning. It could be the worst week of my life, as well as the best. People tend not to be able to do my job for long. Large parts of it are incredibly arbitrary and stressful. I fantasize about a gig where I have a weekly column or a couple of posts a day to write and not much else, where my time is my own, and I can work from St Bart’s, and my only worry is coming up with the next topic to write about. *

But I digress.

Jim Cramer’s biggest problem, or rather the biggest problem I think people have with him, is that he is neither fish nor fowl. He tries to have it both ways, and does both punditry and investment; he is like a free to air newsletter writer, who likes to “entertain” as much as he tries to “educate”. Investors appreciate that he does research and takes positions, but find it hard to take the buffoonery seriously, and distrust the snap judgements of his quickfire opinions. Bloggers and other writers do not appreciate someone having been wrong getting away with it. So when something does go wrong, or when a count of his verbal picks (tics?) throw up a negative result vs the S&P, it’s very satisfying for them.

Cramer probably feels he gets enough stuff right to compensate for the errors he will make. Indeed, his “charitable trust” portfolio seems to be handily outperforming the S&P500, a fact which seems to have escaped his critics. He does not lack self confidence, or self regard. In being a media figure who actually tries to tell people what they should be doing, damn the torpedoes, I think he is trying something brave and new-ish. I have more sympathy for him than I do for people unwilling to put any skin in the game yet who criticise risk takers with the benefit of hindsight. Damien can have a laugh at Cramer for saying “Bear Stearns is OK” just before it went under, but unless we know what Damien’s opinion was at the time as well, it’s a pretty cheap laugh.

That said, I don’t think what Cramer is trying to do really works. I trust he’s totally genuine about trying to help, and I am sure a lot of people get something out of it. But no matter how much people may want to have someone to tell them what to do, there’s no real benefit to anyone in trying to do that. They won’t be grateful. It will go wrong. People will wilfully misunderstand you, point out your failures and ignore your victories. “Cramer makes money” is not good copy for editors; “Cramer in fact an idiot” is much better. Cramer knows this; tips are for waiters, he says. He wants to “educate” the public instead, so individuals can go up against the “big boy” institutional investors and hedgies and “have a chance”. Fat chance, I say. Even if it is full of excellent advice, 20 minutes of TV a day isn’t going to help Joe Schmoe have much of a look-in trading against me in stocks I know really, really well. It’s like giving someone a spear and telling them they now have a chance against someone piloting an Apache gunship helicopter.

This is why, among other reasons, I have been very careful to resist making this blog into anything remotely appearing like investment advice. I am terrified of the dunderhead who goes out and sticks his life savings into RIMM because I blogged about it positively. I don’t want anything like that to happen, even if the stock goes up and it works well. Because at some point it won’t, and then he’s going to be well hacked off. It’s not like there’s anything in it for me either; I won’t make any money out of the dunderhead. All I have are non-offsettable downside risks — he might come after me with an axe.

The world is full of crazies, dear readers. Spinoza himself knew this, and was careful not to have his ideas spread around C17th Holland, no matter how convinced he was that they were true. His Ethics were published only after his death. Not everything is suitable for everyone, all the time. Unlike my thoughts about iPhones, Spinoza’s ideas about religion and nature were radical enough to put him in mortal danger. For his philosophy he had been excommunicated and made anathaema to his ethnic community and family, someone had tried to assassinate him, one of his best friends died in prison for similar beliefs and he had seen his own political protector dead, torn apart by an angry mob. So “Caute” (“Caution”), the motto on his signet ring, was not merely for fun. And so it is with this Baruch.

Much more than philosophy, investing should be a solitary activity. A group of people or colleagues you can check your ideas with is a good thing, but you must take responsibility for your investments yourself. You will receive conflicting advice, all of which will sound plausible but most of which is wrong. Consider that 98% of the people you encounter who claim to know what they are talking about simply don’t, and have as much chance of being right about these things as you do. You will find out about things you need to know much much later than the professionals. You will need to make most of your mistakes yourself, and it will take a long time and much capital to gain the context to be able to properly learn from them. Being in the market is the only way to get its benefits, the positive black swans that occur all the time and which rarely get written about, but know also that professionals as a rule consider retail investors to be the patsy in the market. In their minds they are the sheep, and the sheep get shorn. The greater level of sophistication you are likely to get out of watching Mad Money or subscribing to some websites may help, but it is a drop in the ocean compared to what you will need to succeed.

Unless you are willing to make the huge effort being a consistently successful investor requires, I still think the best way to exploit the market is to pay someone you trust to look after your investments and/or to invest with professionals who you think can really make money consistently (at least you can threaten to sue them if it goes wrong). This will, I promise you, not be cheap, and you may need to give them a lot of money to invest to get them interested. But if you find the right one, you’ll probably end up ahead. Or join an investment club, concentrate on a few stocks and parcel out the research. That could work too.

Ultimately the gulf between investor and pundit exists for a reason. Maybe one day it can be bridged. Maybe individual investors will somehow smarten up relative to the professionals. But I doubt it for now.

* if you do have a pure writing gig for Baruch, I refer you to the “contact me” page. Note well though, that his current beloved employer pays him vastly more than you are likely to be able to afford, with probably more job security, dying newspaper or struggling online franchise that you probably are.

5 thoughts on “No Stock Recommendations here; move along”

Bravo! This post is full of so much truth it makes my head spin. You’ve even managed to make
me question my own blog! When I first started it, I thought I was doing others a favor by pointing out hedge fund managers to follow. That way everyday investors wouldn’t have to rely on financial pundits in the media. But now I leave this post hoping people aren’t blindly following their picks! As you mentioned, that’s a tremendous responsibility and burden even. Thank you for penning this as I now dive off to a pensive state questioning the goals and purpose of my blog. Seriously, bravo, great viewpoint.

I would be very very upset however if I had anything to do with you changing your blog or anything like god forbid, stopping blogging. What you do is very far from anything like what I was writing about. In a good way, I hasten to add. You run a very valuable information service!

You might be interested to know that I often get excerpts from your posts emailed to me by people at work. I imagine (you would know much better) that quite a lot of your audience are hedgies trying to find out what each other are doing. If so, you really don’t have to worry about them, they are big boys.

Thanks Baruch. To clarify, it’s not as if I’ll stop blogging. But it just made me think about how the information is used. You’re right in that a large portion of the audience is comprised of hedgies. At the same time though, I know there are retail investors reading. More than anything, it made me more cognizant of what I’m posting and how the information is conveyed.

Many financial journalists have a point in their life when they seriously think about becoming portfolio managers rather than just writing about investing. They have the knowledge and they know how smart (or not) the professional investors are who they would compete with.
Many make this decision (usually the younger ones), earn much more and become good portfolio managers.

Most portfolio managers have many points in their life when they seriously think about doing anything other than investments could lead to a much happier life. Only a few make this decision because they have an addiction to risk and/or annual bonuses.